IMF applauds tax collection, increases borrowing ceiling

By Samuel Sanya

The International Monetary Fund (IMF) has increased Uganda’s borrowing ceiling for non-concessional debt to $1.5b (sh3.9trillion) from $1b to accommodate infrastructure investment in a new three-year Policy Support Instrument.

“Important progress has been achieved in institutional modernisation. Public financial management has been significantly strengthened,” said Naoyuki Shinohara, the IMF deputy managing director.

“To ensure inclusive growth and deal effectively with the challenges posed by natural resource production, further structural reforms to improve the business environment, enhance competitiveness and productivity, promote diversification and strengthen the social safety net remain essential.”

The IMF applauded government institutions, notably Bank of Uganda, in the sixth review for satisfactory implementation of their economic programme under the Policy Support Instrument.

It, however, faults the country for missing benchmarks related to tax expenditures, arrears control, introduction of national identity cards and budget credibility.

“Prudent policies were successful in bringing inflation under control, raising economic growth and strengthening the external position,” the IMF said in a statement.

It notes that the recent fraud scandal in the Office of the Prime Minister led to donor withdrawal of budget aid.

Uganda’s economic growth has rebounded to 5% from 3.4% and is projected to reach 7% this financial year.

A surge in inflation in the year 2011 interrupted the objective of moving growth to potential, but output is now recovering from a historical low. Inflation is close to its 5% target level and international reserves are growing rapidly.

The IMF notes that authorities have managed large foreign exchange inflows successfully.

It urged the Central Bank to remain vigilant to potential demand pressures and stand ready to adjust the monetary policy stance if needed and to continue exchange rate flexibility to spur growth.

The IMF programme aims, among other things, to support Bank of Uganda’s move from inflation targeting ‘lite’ to fully fledged inflation targeting in the next three years, supporting the development of the financial sector.

In the short term, fiscal policy will need to focus on increasing tax revenue collection which is low.

Uganda’s tax to GDP ratio is at 12%, the lowest in East Africa behind Rwanda at 14%, Tanzania at 15%, Kenya at 21%.

Maria Kiwanuka has tabled proposals in Parliament that will grow Uganda’s tax base this financial year. More than a third of the sh13trillion budget will go to infrastructure and energy expenditure.

Financing of the national budget is set to rely less on budget support and more on improved revenue collections, domestic debt and higher non-concessional external borrowing.

The IMF notes that oil production expected to start in 2018 underpins a favourable medium-term outlook, but poses resource wealth management challenges.

“Insufficient implementation capacity, governance and policy coordination could threaten growth prospects,” it says.
Infrastructure development got a big potion of this year’s budget